5 Ways "Consumer Protection" Hurts Consumers

The debate over financial regulation is stuck in a false dichotomy. Many see it as a zero-sum trade-off between protecting consumers on the one hand, and defending business interests on the other. This was on display over the weekend as Richard Cordray, Director of the Consumer Financial Protection Bureau (CFPB), addressed a crowd at the AFL-CIO Labor Day picnic.

Financial regulation is the enemy of consumer protection. In his speech, Cordray identified three problems that his bureau has attempted to address: inferior financial products, unequal access to financial services, and lack of access to traditional credit. Cordray identified the source of all three problems as a lack of government regulation. But while Cordray identifies problems that cause harm to consumers, his solutions have done little to solve them. All too often, government regulations have resulted in more harm to consumers. Both consumers and businesses would be better off if they were free from government interference.

Below are 5 examples of how regulations in the name of consumer financial protection actually work to hurt consumers, relegating many to the fringe of financial services.

Qualified Mortgage rule. The CFPB has sought to impose uniform standards on the mortgage lending market through the Qualified Mortgage rule. This is a hard thing to do for a product that is inherently subjective – what is suitable for one person may not be for another. Banks, in turn, have become increasingly open to lawsuits for overestimating a borrower’s “ability to repay.” With huge new costs and liabilities, many have simply stopped issuing new mortgages altogether. The CFPB rule has resulted in historically low volumes of mortgage loan originations, especially for the less fortunate.

Arbitration rule. Earlier this year, the CFPB dropped their highly controversial Arbitration rule. The rule bans companies from instating mandatory arbitration agreements in their products, instead favoring class-action lawsuits. Companies often prefer private arbitration courts because the justice system is incredibly slow and costly. Forcing companies to face class-action lawsuits is therefore expected to raise the industry’s costs by $5 billion over the next five years. Further, the CFPB’s own study found that mandatory arbitration

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